The transfer pricing regime has been revised by rules issued by the Ministry of Taxes on 27 January 2017 and effective from 8 February 2017. Further amendments have been made in the law effective 1 January 2019.
The rules apply to controlled transactions where the price agreed for goods, works or services deviates from prices agreed in uncontrolled comparable transactions.
Effective 1 January 2022, the transfer pricing rules apply to controlled transactions between the following:
- A resident taxpayer and non-resident related parties, including transactions with a resident's representative office, branch office, or other unit abroad;
- A permanent establishment in Azerbaijan of a non-resident with such non-resident or any representative office, branch office, or other unit of such non-resident abroad;
- A resident taxpayer and/or a permanent establishment situated in Azerbaijan of a non-resident and persons in a jurisdiction with a preferential tax regime; and
- A resident taxpayer and/or a permanent establishment situated in Azerbaijan of a non-resident and other non-residents if:
- the goods to be delivered are listed on international commodity exchanges; or
- the total income of the resident or permanent establishment exceeds AZN 30 million in the relevant tax year and the value of transactions with each non-resident amounts to more than 30% of total income.
According to the transfer pricing provisions, persons (whether individuals or legal persons) are deemed to be related where:
- One person directly or indirectly holds 20% or more in the capital or voting power in another person;
- One person reports to or is otherwise directly or indirectly controlled by another person;
- Both persons are directly or indirectly controlled by a third person; or
- The persons are next of kin.
Transactions with persons established in a preferential tax jurisdiction are deemed as controlled transactions regardless of the actual relationship between the parties (see Sec. 13.5. for list of jurisdictions so classified).
The following transfer pricing methods apply to transactions between related parties:
- Comparable uncontrolled price (CUP) method;
- Resale price method;
- Cost-plus method;
- Transactional net margin method; and
- Profit split method.
There is a strict hierarchy approach, with the CUP method being considered the preferred method, and other methods may be used only if the CUP method is not appropriate for the determination of an arm’s length price in the relevant circumstances.
Rules on the use of comparables are not specified, and the tax authorities have not shown any preference for local comparables. See under Standard Documentation below for sources of information generally accepted by the tax authorities.